We're not used to things falling apart, and so our first reaction is disorientation. What we've been trained to expect by constant intervention in supposedly "open" markets is that Central States and central banks will "save the day" with a new intervention: an interest rate cut, a new round of money-printing, emergency loans, new bailout funds, the list has been almost endless since the initial evidence of the Great Unraveling appeared in 2007. So when official interventions are announced to great fanfare and then fail to goose the market, we're disoriented. The problem with depending on intervention "sugar" for sustenance is that the market slowly loses its sensitivity to the mechanisms of control (insulin), and at some point the sugar no longer generates a response. We are very close to that point now, as the expected "grand EU treaty agreement" is duly issued as expected and global markets are holding their breath, hoping that some new intervention will keep the teetering financial system from falling over the edge. This is desperation.
Evolution Securities Warns Of "Total Carnage And Meltdown" As European Bank Sales Of CDS On European Sovereign Debt SoarSubmitted by Tyler Durden on 12/09/2011 14:18 -0400
As much as we hate to say it, Europe is now without a shadow of a doubt the new AIG, only this time such heretofore considered insane (in retrospect) activities as doubling down to infinity on ones TBTF status are out in the public record for all to see. At least AIG conducted Joe Cassano's "made in London" $2.7 trillion bet on home prices never dropping in the shadows of Curzon 1. Whereas two days ago we made it clear how the unwind of trillions in rehypothecated securities could be the avalanche that buries first Europe and then the world, we explicitly excluded the impact of synthetic products such as CDS. Now it is time to bring the picture full circle, and put CDS front and center. As Bloomberg reports, "BNP Paribas SA, France’s biggest bank, sold a net 1.5 billion euros ($2 billion) of credit- default swaps on the nation’s sovereign debt, according to data compiled by the European Banking Authority. UniCredit SpA, Italy’s biggest lender, and Banca Monte dei Paschi SpA are net insurers of more than 500 million euros each of their government’s bonds, and Oesterreichische Volksbanken AG, the Austrian lender which has yet to pay interest on 1 billion euros of state aid received in 2009, has guaranteed a net 839 million euros of its national debt, EBA data show." (EBA source - link). For those confused by the above, here is the explanation: European banks, in order to generate modest cash flow from collecting on the pariodic interest premiums owed to them in order to plug increasingly large capital shortfall holes that otherwise would simply keep growing ever larger, have sold and continue to sell massive amounts of default protection on their very own host countries! As a reminder, it was precisely this that destroyed AIG when the illusion of the credit bubble burst.
While consensus forecasts for next year continuing to be muddle-through mediocrity with a crashtastic defensive bias, BofA Merrill Lynch provides a very succinct outline of the bullish, bearish, and interestingly secular cases for risk assets going forward. The cross-asset class implications are noteworthy and provide an excellent jumping off point for asset allocation decisions. We are not sure the seeming knife-catching perspective of "buying humiliation and selling hubris" will work out, but one thing is for sure, with this volatility, relative-value remains the critical alpha as beta chops everyone up. Once again the bull case relies heavily on government printing presses and the bear case on the reality of debt saturation breaking through.
By now, most sane market observers and participants understand that perhaps, just perhaps, everything we believed about neoclassical economics is not without fault. In fact it is possible that the entire macro-economic safety net of Keynesian policy has come into question. One look at the chart below of the changes in US financial stock prices should be enough to show that when S&P downgraded the mighty USA's credit rating, they proved the impossible is possible. The market is now entirely paranoid. Investors have fled the market in droves, as we have discussed endlessly. The banks themselves seem to question their own existence given the plunge in liquidity, and the huge rise in volatility and correlation appear to suggest the market is indeed terrified of its own shadow.
Every year since 2005, more than 50% of China's GDP has consisted of construction-related spending. The law of diminishing marginal returns says this simply cannot continue. It represents a misallocation of the household sector's hard-earned savings on a colossal scale, and I believe it will end badly. Not a day goes by that there aren't riots and protests somewhere in China (including cyberspace) as the downtrodden man in the street reaches his froggy boiling point. Increasingly in China, though, those who see the writing on the wall can see that the days of system stability are numbered. And they're not hanging around.
The Council on Foreign Relations has released their politically-correctly-named 'Preventive Priorities Survey' or put another way - where-in-the-world-is-stuff-going-to-hit-the-fan-next report. The report is designed to help the US policy community comprehend where the next conflict will occur in the world and the relative catastrophe factor. The 3 tiers of chaos offer a menu of drivers-for-war, likely terrorist targets, and political tensions. Notably they include such systemic factors as the European debt crisis, budgetary limits, and Saudi political instability's impact on oil supplies at Tier 1 (most critical) contingencies.
Goldman has just started selling European bank stocks to its clients, whom it is telling to buy European bank stocks. Said otherwise, the stolpering of clients gullible enough to do what Goldman says and not does, has recommenced. Our advice, as always, do what Goldman's flow desk is doing as it begins to unload inventory of bank stocks. Translation: run from European bank exposure.
Yay verily, Michigan Consumer Sentiment jumped more than expected and there was rejoicing all around. Of course, a simple scratch beneath the surface reveals what many realists suspect, expectations for the future are the major driver of the headline number. Unfortunately we have seen exactly this pattern before. Not only are the levels and changes similar to Q3/Q4 2008 but the underlying events (recessionary concerns, banking liquidity concerns, crisis of confidence) are eerily similar. The we've-been-down-so-long-it-has-to-get-better crowd psychology is intriguing as the rise in hope over the past four months is the largest in over 30 months as the delta between current reality and the green green grass of next year drops. While animal spirits are arguably of interest in short-term macro cycles, we note that the ramps in the hopium index tend to last 4-5 months at most and that is where we are now.
Last night, when headlines hit that it was the UK's "fault" for vetoing a joint dictatorial Fra-Ger "compromise" and in essence making the Eurozone summit a total failure (with a follow up summit scheduled for March), it became clear that a new cold war has broken out in Europe: between France (not so much Germany as Germany frankly does not want to bailout Europe if its has to pay for the bail out) and the UK. We now have official video confirmation that the latest conflict in Europe is between the countries just across the Chunnel. The video below of a diminutive Sarkozy giving David Cameron the proverbial cold shoulder (described in painful detail here) will achieve nothing but merely inflame further the animosity between the two countries: just what Europe can least afford right now.
Just because Solyndra was not enough of a humiliation for the president, not to mention MF Global where inquiring minds are wondering when the president and vice-president will refund any and all campaign donations received by Jon Comminglerzine, here comes the next public fiasco for the administration, as the broader public shifts its attention to LightSquared by way of owner Harbinger capital, and its flamboyant head (and wife) - Phil Falcone. As has been just released in an SEC filing, Harbinger has received a Wells Notice from the SEC. Now in a time long, long ago, or about three years ago, before market criminality and manipulation became wholly endorsed by the US government, getting a Wells Notice was a death sentence for any hedge fund. Alas, it still is: "The Wells Notices state that the staff intends to recommend or is considering recommending that the Commission file civil injunctive actions against HCP, Harbinger Capital Partners Offshore Manager, LLC, Harbinger Capital Partners Special Situations GP, LLC, Mr. Falcone, Mr. Asali, and Ms. Roger alleging violations of the federal securities laws’ anti-fraud provisions in connection with matters previously disclosed and an additional matter regarding the circumstances and disclosure related to agreements with certain fund investors." And whether the Wells Notice is merely an inquiry into Falcone previous shady hedge fund-dipping practices described here, or a preamble to a full blown public spectacle-cum-humiliation on Harbinger's LightSquared remains to be seen. One thing is certain: Mrs Falcone will milk the newly found notoriety to its full extend, prenup firmly in gold-braceleted hand.
Confused why Tim Geithner has seemingly booked a weekly round trip ticket to Brussels to give the Eurocrats their weekly pep talk (much to his endless humiliation as Europe Tells Geithner To Take His Advice And Shove It reminds us)? Art Cashin explains not only this, but why the biggest threat to Obama's reelection chances is not who the GOP candidate is in November, but what happens in the EURUSD as early as today. Lastly, by implication, Cashin shoots down any hope that US decoupling from Europe is even remotely possible... something anyone who actually has seen a full business cycle, which automatically excludes 90% of all traders today, will know too well.
While destroying the myths and biases of the plenitude of long-only talking-heads seems to have been the mission of Mr.Market for the last decade or so, Lakshman Achuthan of ECRI does an excellent job of dismissing the coincident indicator trees for the leading indicators forest in an interview with Bloomberg TV. His 'recession is happening' call from September 30 still stands, proving he does not flip flop like all other so called experts on every up or downtick in the SPY, and is expecting a formal recessionary print in GDP within three quarters, though noting that the recession very likely did not start in Q3. The constant clamoring of the consensus that we will 'muddle through' or that we are firming in hopes we repeat the Keynesian love-fest of 2009 (which he rejects as nothing being indicative of this at all) is eschewed as the man-with-the-best-name-for-anagrams-in-finance gives Tom Keene a little history lesson on the foibles of minute-by-minute coincident (or short-leading) macro data watching (and prognosticating). The ongoing deterioration in the ECRI index (and leading indicators) combined with his noting that GDP tends to revise/revert towards GDI (even though the two should be the same given their either-side-of-the-same-coin nature) and the previous GDI print was much weaker. He ends on a less than optimistic note pointing out that the pace of each economic recovery since the 1970s has been getting lower and lower and cycle volatility has increased helping to confirm his recession-is-happening call.
So the ESM is going to be implemented ahead of schedule. Or at least that is the current plan, although it seems that Finland is insisting that it retains unanimous voting and most (all?) countries still need to ratify it. The ECB will oversee the ESM and EFSF, which is good as they have more market experience than the EFSF head, but does mean they will be reluctant to print which is what the market really wants. The ESM will have an effective lending capacity of €500 billion. That document states that the lending capacity of €500 billion includes any capacity being used by the EFSF. The EU statement confirms that. So between EFSF and ESM, the combined lending capacity is €500 billion. “The ESM will use an appropriate funding strategy so as to ensure access to broad funding sources”. So the ESM has paid in capital but it will continue to try and raise money based on guarantees and commitments. I know this is a detail that people want to ignore in the rush to proclaim “paid in capital” but the reality is that the ESM is not so dissimilar from the EFSF... On a side note, Europeans seem to love night clubs much more than Americans. Maybe that is why they make all these announcements at 5 am? They are used to "table service" shutting down around that time and having to make a decision of what to do next. I can count how many good decisions I've made at 4 am after an all-nighter on one hand. Why will this be any different. It feels to me like at the end they shrugged their shoulders and decided to settle because it wasn't going to get any better and they didn't feel like saying the night had been a waste.